Category: Opinion

A friend said this to me today, and I burst out laughing because I thought he was joking, but it turns out he was quite serious. He told me his story, and I think a lot of people will be able to relate to it, and perhaps recognize the same behavior in their own self and avoid making the mistake.

My friend did his school and engineering from a small town in India, and joined an IT company in the late 90s. He started off with a small pay and his hard work and middle class ethos helped him make the most of it and live a happy life.

After a few years, he got stock options, and that changed everything. He had this notional wealth against his name, and that made him spend more freely than before and as a result, he had to borrow small amounts from his friends every now and then to keep up with the spending, and what seemed like small innocuous sums ate into all the money he got from his stocks when they vested.

This was a bitter lesson because his classmates who joined the same company were buying tangible things like a car or a bike with the money whereas he had nothing to show for it.

Life went on, and he got back to his regular ways but then after two or three years he job hopped twice and got an almost 80% pay hike within a period of 6 months.

He started seeing more money flow in every month, and unfortunately for him, he got a credit card with a limit of close to Rs. 5 lakhs at the time. He got into the habit of spending freely again and before he realized, he had run quite a huge credit card debt and along with his home loan EMI, it was hard to pay off anything but the interest on the credit card.

So for about 10 months or so he paid just the interest on the credit card, but he got really fed up of that and decided that he needs to do something.

So, he took a personal loan and paid off the credit card, and in about one and a half years or so he reduced his personal loan to half as well.

But then, his company decided to send him abroad for a year, and in the three months he had when the decision was taken, and when he did fly out, he ran a big credit card bill again!

Just before leaving, he finally cut up his credit card, and vowed not to get another one ever (a promise he broke shortly thereafter; for the convenience, not the credit) but he is still saddled with a home loan EMI, a personal loan EMI and a credit card EMI.

This is really crazy, but I don’t think it’s all that uncommon, shows that personal finance is as much about behavior as it is about numbers.

Last week, Kiran Telang wrote a very comprehensive review of ICICI Prudential’s SmartKid Child Plan over at The Financial Literates. I’ve heard about this plan earlier but didn’t bother to go into details because usually these type of plans don’t have a very high rate of return and they sell more on their emotional appeal rather than their financial return.

Kiran’s analysis shows that this is true for this particular plan as well, as the IRR for the product comes out between 3.35% – 6.3%. The article and the comments on it reminded me of a conversation that I had with Santosh Navlani of MoneySights a few months ago on Twitter.

He made the excellent point then that a lot of these plans are packaged as solutions for children’s education or something else like that and come with a long lock-in period, and a lot of people get swayed by the indicative rates that are shown by illustrations on these product. I think a lot of people who buy these products later find out that it’s not what they thought it to be. Bemoneyaware documented the whole thing and has a great post here.

Since Santosh made that point, I’ve been a lot more aware of these type of questions and products, and the big lesson here is that there really are no financial solutions that can be bought right now.

Your best bet is to not get swayed by advertising and focus on just the numbers (easier said than done) and you will always be able to create solutions yourself without needing any products to do that for you, and in any case, there aren’t many decent solutions (if any?) that exist today so the time spent looking for products that fit your need is better spent defining your needs and then combining a mix of simple, easy to understand products that give you what you want and don’t surprise you later on.

The Financial Express has a story today about a possible diesel price hike after the presidential poll and as ridiculous as this is, unfortunately, it is a common thing, and shouldn’t surprise anyone. To be clear, the price hike is not ridiculous, the heavy burden that under recovery of diesel prices puts on the India’s finances leaves no option but to increase prices and pass that on to the consumer, but the timing is crazy.

What does a presidential poll have to do with diesel prices?

As long as you have the government involved in diesel pricing, this politicking will continue and there is simply no way out of it. As crazy as this may sound, it is nothing compared to the other things that the government is engaged in.

Air India has been bleeding money for ages and somehow the government and even a large group of ordinary folks who will never set foot on an Air India plane think that it will somehow hurt national pride (whatever that is) if the government got out of the airline business and left it to private hands. What rationale does the government have to run an airline, specially when it does such a terrible job of it?

This however, is not as ludicrous as the government running a three wheeler company! Scooters India Limited is the “future of three wheelers to come” according to the much fashionable flash intro on their website which fails to mention that it is also a sick PSU which the government has been unable to divest and as a result continues to run it at a loss.

What sense does this make?

The experience of the post liberalization era has shown the the private sector is able to compete with foreign firms and is able to provide a lot better services than the the government when it is allowed to.

Indians of this generation have not been smarter or more hard working than their parents, yet they enjoy a much better material life. Why is that? It’s because they were lucky to have a better system around them.

Far too many of us assume that it is India’s destiny to keep growing and improving the standard of living of millions, and I’m sure everyone thinks that India 20 years from now will be a lot better than India today, but that’s a misguided assumption because without the drive to free markets and further liberalization, there is now way to keep forging ahead.

De-risking a portfolio is a process where you get rid of your risky equity investments and replace them with safer fixed income investments when a goal is nearing or when you feel you will need money in the short term.

The question of how long in advance should you prepare to de-risk your portfolio appeared a few days ago in the Suggest a Topic section, and I have done this once myself so I’m sharing what I did and my rationale behind it.

I have invested in stocks since I was 17 or 18 and all my money has always been (still is) invested in equities (not recommended to others) except for one stretch of about a year when I had to de-risk my portfolio.

That was one when I was getting married. I got married in the January of 2010, and like most people, that was a significant expense for me.

I remember the broad details from my plan at the time, and I downloaded my brokerage statement which has the date wise transactions to refresh my memory on what was going on at the time.

Stopped buying shares 9 months before the wedding

The last big buy transaction on my statement was in April 2009, which was about 9 months prior to my wedding. So, at that point I decided to not buy any more shares and save that money for the upcoming expense. Now remember, this was quite soon after the big bad crash of 2008, and anyone who witnessed that crash or the one before that knows that markets come down very violently very quickly, and there is just no way to get out of the market during such crashes. So, keeping that in mind, about 9 months prior to the wedding, I stopped investing in risky equity and saved that money.

That was the first step to de-risk my portfolio – to stop my equity investments and reduce my exposure that way. For most people, you won’t need to stop all your equity investments altogether because you will have other safer investments also, and not everything you have will be invested in risky stocks.

I would imagine that moderating your ongoing investments before a big upcoming expense about a year in advance is worth a thought for everyone though.

I would love to say that I started a RD or some other investment with this money, but that won’t be true, the money that didn’t go into stocks just stayed idle in a savings bank account. Everyone else should however think of using up this money more wisely and putting it into a safe instrument that can be liquidated easily.

Started selling 3 months in advance

Stopping equity investments only saves you that much money, and the bulk of the money was raised by selling stocks in two periods of time.

I sold the first big chunk in October which was about 2 – 3 months before the wedding, and the dual reason was that you need some money a few months in advance and that I wanted to lock in some gains that the great year of 2009 brought for most investors. I think leaving the selling to just 2 – 3 months before the wedding was cutting it close but I was able to do that simply because I was sitting on gains and it was quite clear to me that it would take something very dramatic to put me in a position where I come up short for money.

Interestingly, the second big sale was on the 21st January, which was just two days before the wedding on the 23rd, and even I feel quite incredulous that I waited that long to make the sale – again the only reason I could wait for so long was that the market was doing well and I didn’t feel pressed for cash.

I don’t think it is advisable to wait just 4 or 5 days before you actually need the money, and I think you should have all the money you will possibly need at least 2 – 3 months in advance safely in the bank.

My goal of derisking

As I think about my decisions at that point in time, my first goal was to not sell at a big loss. This was a big concern for me because I didn’t have any other investments to fall back upon if the market fell. I would have been forced to sell my shares at a loss to raise the cash.

Stopping my equity investments and locking the gains in my portfolio gave me the comfort to know that I won’t need to sell a lot at a loss if a 2008 like situation resurfaced.

The second goal was to maximize the return, which is always a goal for everyone, and although I wasn’t hurt by what I did – I think that was not the prudent thing to do and if a 2008 like situation would have emerged, I would have felt a bit of discomfort. I think getting money in hand two or three months before the actual expense is due is a wise thing to do and everyone should plan for that.

My approach was anchored on not selling at a loss and was suited to my financial situation at the time, this will be different for everyone but I do think a common sense approach of planning for a big expense, a year or so in advance is sufficient to keep you in a comfortable state provided it fits within your longer term goals and plans.

This post is from the Suggest a Topic page.

Last weekend, I linked to a post which had a report from Lloyds TSB International about India being the fastest real estate market in the world in the last decade where property prices have risen by 284%.

This reminded me of a comment that was posted on the Suggest a Topic page some time ago, here it is:

Rakesh May 15, 2012 at 5:16 pm [edit]

You should write some articles on HUGE REAL ESTATE MARKET in India. Where are we heading? Are we going USA / Europe / UAE direction? OR India has potential to absorb all the way and will come out stronger and not like these other countries faced the position in real estate.

My opinion on this is that the price rise we have seen in the recent past is simply unsustainable but whether the whole market will collapse the US way, and a bubble in that sense is forming – I don’t know.

I’ve stated this view several times in comments earlier as well, and I have many reasons to think this way, but I’ll talk about two today, which have been on my mind recently.

In big cities where house prices are really high, for most people, there is no way to buy a house except to take a substantial loan and then be burdened by an EMI for a very very long period. I know a few people who have done this and the negative impact this makes on your lifestyle far outweighs any benefit that you get out of this.

I think sooner or later a lot more people will come around to this view and resist the peer pressure which is largely the reason people make these type of commitments in the first place.

The second reason is to do with land acquisition and developing real estate, which is a huge problem right now. There is a lot of land that developers aren’t able to acquire and in cases where they are able to acquire land, they sit on a lot of it so that the prices don’t collapse.

There is corruption and policy paralysis, and a great example of that are the thousands (if not lakhs) of buyers in the Greater Noida area who are stuck with EMIs on houses that don’t see much hope of getting constructed, and are in a terrible situation right now.

This situation also needs to change or demand for units that are under construction will fall down because anyone who has witnessed the hardship that you have to face if your money gets stuck in such a developments vows to never get into another transaction of this type ever again, and strongly influences anyone who is watching the situation.

In my opinion, the consequence of this will either be an improvement in supply where policy making is better or a reduction in demand because of the uncertainty such a thing brings about and both will lead to fall in prices.

Finally, from the perspective of an individual, I think you have to see how much sense it makes to buy a house thinking of it as an asset when deep down you know it is not likely that you will sell it because you are making a profit, and it will behave more like a liability because of the huge EMI burden that it places on you.

One of the things that I find most incredible and interesting about blogging is how different people use OneMint, and I’m always keen to hear if someone has anything to say about how they have used the site.

I find that listening to these stories is the best motivation to continue writing, and the range of readers and the way they use OneMint truly amazes me.

Mr. Chari is one such reader who I exchanged emails  a couple of weeks ago, and he shared his approach to manage money, and how he has benefited from the site.

He graciously gave me far more credit than I deserve as is evident by most of his ideas that I never wrote about,  and looking at his detailed emails, I thought they will make a good post as there are some very good takeaways here.

Thank you Mr. Chari for your time, and here are some of his thoughts that he shared with me (edited).

1. I had to invest my father’s money which was quite an amount in tax free bonds, but after your article comparing tax free bond returns to SBI fixed deposit, I found putting the money in cumulative fixed deposits proved to be more profitable he being a senior citizen. As for me who is in 30% bracket, I invested in tax free bonds.
2. Your blog on infrastructure bonds also proved useful in choosing the AMC for investment.

3. I also invest in gold ETFs as well as the scheme by Tanishq where you can invest for 2 years monthly with any fixed amount and book your gold. You can choose any day of the month whereby I track gold rates and book on the day it has fallen.
4. I advise my office to deduct an average sum of income tax monthly. I know that at the end of the year it will fall short because we are given DA every six months being a government employee. So I opened a recurring deposit account of 10,000 per month for one year in bank. I get the interest plus the capital so I save quite an amount. The interest takes care of balance income tax and the principal is partly invested and partly spend for festivals.
5. I also regularly invest in 5 equity, 1 hybrid and 2 debt funds irrespective of the market fluctuations for the last 8 years. I am on a handsome profit.

Whenever DA goes up I try to take one additional SIP in the existing scheme only. I do not get chance to make any additional investment because I am already booked and have no surpluses except for some emergencies. But I do stick to what I have and all of them are deducted through ECS from my bank for long periods so nothing for me to worry.  In 2008 and 2009 I have seen my funds have gone negative to the extent of 66% but I still stuck to my investments due to which I am well off now. I stopped tracking them but invested through SIP’s thinking I am getting more number of units and whenever market goes up it will benefit me. It is a game of patience, that’s all.

6. Till one and a half years ago I was very jittery when investing in direct equity. I have tried retaining good stocks for quite a long time but it is still in a loss. I am more comfortable with MF’s so religiously invest in it. May be I need to develop more confidence at 59.

7. The last is the same as in your recent article on unnecessary purchases. I reward my children and my wife for not doing so. So the reward is proving to be cheaper than the unnecessary purchases. For the kind of salary I get the savings are around 48%.savings being slightly higher because of frugal living and low needs in a small place as Raipur. I know I am not perfect but even at this late stage I am taking up whichever is beneficial. I don’t know how you would react to such small things. These small things are definitely helping my colleagues and students in their life which I believe is more richer.

I felt that these were some great ideas and once again, I’m really thankful to Mr. Chari for sharing his thoughts. I’m really keen to hear comments on this one, so please post any thoughts that you may have!

 

I’m sure most of you are familiar with Perfios, and I’m happy to say that they have graciously agreed to offer free online tax filing to 25 OneMint readers.

I have never used this service myself and can’t talk about it in detail, but in general Perfios has great quality products, and I’m glad that 25 OneMint readers will be getting this online tax filing for free.

How to enter this giveaway?

This giveaway will be limited to the first 25 people who sign up with Perfios and this of course means that you are not eligible for the give-away if you have already signed up with them.

Here are the detailed steps:

1. You sign up with Perfios using this link. This is an automated page, and it will allow the first 25 registrants to file returns for free.
2. After the free sign ups are used up – you will be asked to pay a price of Rs. 125 for filing.

Please note that if you add another form 16 you will have to pay extra based on their rate card here.

It’s that simple!

I was surprised when I came across this article in the Financial Express that cited a Visa report which found Indians to be one of the least financially literate in the world.

I couldn’t find the report and it is really impossible to say who is the least financially literate in the world, but it did remind me of an interesting incident that occurred more than a year ago.

An advertiser who was based in the US approached me for advertising on the site, and I kept referring to OneMint as a personal finance blog; at some point he stopped me and said that I’ve gone through the content and this is an investment blog, not a personal finance blog.

You hardly write about thrift and tips for saving money which is as important as investing topics, and other personal finance blogs cover such tips in a lot of detail.

My response was that Indians don’t need tips to save money as that’s something most of us are good at anyway, and if I wrote about saving money that would just bore people away, and I really don’t know what I will write to begin with.

My response obviously didn’t satisfy him because he never did advertise on the site but since that time I’ve modified my opinion a bit.

Now I think that the Indians who want to save money are good at it and don’t need the help of blogs to do it, but there are a lot of Indians who are neither interested nor good at saving, and a lot of them belong to the younger generation who don’t have the burden of family on them, and just want to have a good time.

I’m sure all of you know many folks whose salary gets over on the first itself because of the many EMIs and credit card bills that they have to pay, or someone who bought a phone that’s worth more than a month’s salary, and surely this is not a good financial habit.

Even the ones who are good at saving money may not be all that great at investing it as evidenced by the huge number of high cost ULIPs sold in the country.

I think we give ourselves more credit than we deserve and there is still a long way to go as far as financial literacy is concerned.

What do you think?

This topic has been on my mind for two or three days now, and I couldn’t decide if I should write about something like this or not, but in the end I just couldn’t resist.

I think a lot of people look at someone on television or read something that someone has written in a newspaper and automatically assume that just because they have a big audience they must be right but the truth is that a lot of these people aren’t even trying to be right.

When you think about it, there are hundreds of people on television these days, and an even larger number write for some publication or the other. With such intense competition, how do these people stand apart from each other?

Making outrageous nonsensical statements is an easy and effective way to do this, and when you look at the large number of people who choose this path, you know it is working as well.

There is a lot more entertainment in financial news than there is actual information, and if you were to pick up most pieces written about the Facebook IPO or the petrol prices in India recently – you would see what I mean. Incredibly smart people talk about oil companies screwing the Indian populace without talking about their losses, or analysts talking about Facebook not being there in 5 years from now, well guess what, Facebook most likely will be there in 5 years, but no one will remember what you said 5 years from now, and at least making such ridiculous statements helps you stand out from the crowd today.

The noise is often so loud that it drowns out the few sane voices that exist and in some way the audience is to be blamed as well because people hang on to scary headlines repeating them mindlessly without actually going deeper in the content and questioning whether the content actually reflects the scare that the headline is trying to generate.

The other aspect of this nonsense is commentary by perma bears or perma bulls. A famous Indian mutual fund manager blogs about markets and a few months ago I created a spreadsheet with date, short term predictions that he made, and then where the market was when compared with his predictions. There were two things that were quite easy to spot. One was he always found something to be positive about and second was he was wrong 80% of the time. But to this day he continues to be optimistic and continues to give guidance, not giving a damn to his plentiful wrong predictions in the last 2 years. There are examples on the other side as well, and what good is the advise of such people?

These predictions are all but useless, and just serve the purpose to make the person popular because others are only too happy to repeat that so and so analyst expects the market to end at 21,000 or 27,000 or whatever. Being accurate is not important, being loud and saying something that grabs attention is.

I think it is important for everyone to take a deep breath and think about this for a moment and keep it in the back of your mind that the person who is writing or appearing on television doesn’t always have the same goals that you as the consumer of that news have. Being popular and being right are two different things, and unfortunately you don’t need to be right to be popular.